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Hong Kong is seeking to negotiate a comprehensive double taxation treaty with China in order to clarify the tax rules and ease the tax burden for the growing number of companies based in the territory which are doing business with the mainland.

In a speech to the Hong Kong Federation of Industries last week, Secretary for Financial Services and the Treasury Frederick Ma Si-hang revealed that officials from Hong Kong's Inland Revenue Department are due to meet with their counterparts on the mainland in September for preliminary discussions which could lead to a comprehensive overhaul of the existing tax relief measures in place between China and Hong Kong.

Under the tax agreement put in place in 1998, Hong Kong firms with manufacturing operations in China are permitted to split their profits equally between the two jurisdictions, while individuals are granted relief from double taxation. However, the tax agreement does not currently apply to firms in the service industry, nor does it extend to withholding taxes on interest, royalties and dividends.

"The negotiations will expand the scope of the agreement to save Hong Kong and mainland companies' cross-border operations from double taxation," Mr Ma explained.

"This will ensure Hong Kong's competitiveness and encourage more international investors to use Hong Kong as a springboard for their China investments," he added.

While this is likely to result in considerable tax savings for Hong Kong-based firms doing business in China, tax experts nevertheless warn that a comprehensive new agreement is likely to include a tax information exchange provision, which could mean coming under greater scrutiny from the Chinese tax authorities. They also warn that it could result in a crackdown on transfer pricing.